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Practice News

Owners, neither a borrower nor a lender be

Chris Floyd, Director & Head of Tax Landers

MANY owners of smaller limited companies consider that money that is held in their company belongs to them. While this may be a logical assumption, until those funds are paid out - either as a salary or as a dividend - a distinction in ownership must be made. Any use of that money by an employee, including a director, or a shareholder could result in one or more tax charges applying.

The benefit in kind rules for loans to employees are generally well known. If a loan exceeding £10,000 is made to a employee and the interest paid by the employee is less than the interest at the official rate (currently 2.5 per cent), the employee is taxed on the difference between these amounts.

Details of the loan are included on the employees P11D and tax is paid either through a Self Assessment tax return, or via a restriction in the employees PAYE tax code. Class 1A national insurance (13.8pc) is paid by the employer on the value of the benefit.

It is less well known - and often less well understood - that there can be a charge to tax on the company where a loan is made to a shareholder or other “participator” of that company. As with all tax law, the rules are complex but can be simplified for most situations: Where a loan made to a participator remains outstanding nine months after the end of the accounting period in which the loan is made, the company must pay a tax charge of 32.5pc of the amount outstanding. This tax is then refunded after the loan has been repaid.

Until the 2013 Finance Bill, there had been nothing in the legislation to prevent a shareholder from repaying the loan before the nine-month time limit and then taking a new loan from the company a short while later. However from April 6 2013, when the Finance Bill became law, any loan repayments are ignored if there are arrangements in place to advance further monies to the individual.

There are some limits both in time and money when these rules will not apply but this legislation means that it is not tax-efficient for an owner manager to use his company as ageneral overdraft facility.

The practice of habitually drawing money from a directors loan account and then repaying this at the year-end by voting a dividend will now cost the company 32.5pc of the amountadvanced.

Conversely, if the company can suffer the cash flow issue of depositing 32.5pc of a loan with HMRC, borrowing from your own company can be more efficient than more traditional large, long-term loans. A higher rate taxpayer will pay just 1pc in tax for each full year that the loan is outstanding, with the company paying 0.276pc of the amount borrowed in National Insurance each year.

As with all financial matters, there are exceptions and exemptions to the general rules, so it is important to seek professional advice before taking any action.

No way to run a country or a business

Chris Floyd, Director & Head of Tax Landers

WE ARE currently living in interesting but uncertain times. The recent general election result and the earlier vote to leave the EU show that the people are not happy with the status quo. But these results also show that no one appears to have an acceptable alternative.

The leaders of our country have started negotiating our exit from the EU but without having a solid plan for what they want to achieve. Neither do they have a position where they will say "That just isn't going to work, so we're not going to do this after all".

That is not a good way to run a country and equally it is not a good way to run a business.

Every business owner needs a plan. Or, more accurately, several plans. Some will deal with shortterm goals - such as sales targets for the next week or next six months - whereas others will set out the longterm strategy for the business and for its owner.

During uncertain times short-term goals are still fairly easy to set as they will be based on the current economic climate. On the other hand, long-term plans are harder to set because they will be more susceptible to changes in the general political and economic climate.

We have seen fairly recently how the government can change tack quite quickly to try to achieve its political objectives or in response to public opinion, as with the intended changes to National Insurance contributions for self-employed people, which were withdrawn shortly after they were announced.

Having said this, now is a good time to review any current plans to see if anything within that plan can be actioned now or adjusted to eliminate or reduce the risk of it being scuppered by sudden changes in legislation.

This is not about predicting the future but more about asking "What is the risk to achieving my goal if I do nothing now? Should I accept a lesser result now or continue with my original plan and hope that nothing happens to affect my expected outcome?"

Once you know what you want to achieve, it is good to talk through your plans with a trusted adviser. Talking through both short- and long-term goals will make sure that you do not fall foul of any legislation that you are unaware of.

A knowledgeable adviser will also be able to make suggestions to help to improve your plans and save you money.

In addition, once your adviser is aware of your plans, they can let you know as soon as any new legislation comes into play that may have an impact on your goals. All too often I have been asked to help sort out an issue after the event that could have easily, and for less cost, have been avoided by a little bit of thought and planning.

If you have a plan and no one to share it with or need help in putting your plans together, any of the directors at Landers Accountants - myself, Robert Brown or Martin Matthews - will be happy to have a no obligation discussion with you to see if we can help you to achieve your dreams.

Bid to improve reporting is fraught with pitfalls

Chris Floyd, Director & Head of Tax Landers

HMRC's plans to increase tax revenue by helping businesses to eliminate record-keeping errors may confuse rather than help.

AS MARCH begins, there is much speculation ahead of Chancellor of the Exchequer Philip Hammond's first and last Spring Budget about what will or will not be changed, particularly with the background of Brexit and the government's intention to invoke Article 50 before the end of March.

One thing is clear however; HM Revenue & Customs' intention to press ahead with its Making Tax Digital campaign. While not many business owners are aware of the changes being brought in and the potential impact it may have on the way they run their business, public second phase beta testing will begin next month. Digital record keeping and reporting will then become compulsory (for some) from April 2018.

HMRC believes that a large part of the ‘tax gap' - the difference between the tax collected and the amount that would be due if the correct amount of tax was paid by everyone - is down to poor record keeping and reporting. In fact HMRC considers that this problem is so large that MTD will raise an additional £945 million by the time it is fully implemented in 2020-21.

It says that MTD will not only raise extra funds by helping to eliminate record keeping errors but also will help businesses by giving them better financial management information and earlier indications of their taxliabilities. I am not so sure.

The basic principle of MTD is that every business will be required to keep its financial records in a digital format. HMRC has confirmed that this can be in the form of spreadsheets but any such spreadsheets must meet the requirements of MTD reporting. Many businesses that do not already use commercial software will need to change to be compliant with the MTD rules, although HMRC has promised that there will be free software available for the smallest of businesses. Each business will be required to make quarterly digital submissions to HMRC with a summary of those records.

While this probably will be a simple process for software to deal with, it is difficult to see how this helps to eliminate the errors that HMRC believes exist. Surely if someone struggles to maintain accurate manual records, forcing them to record those same details within unfamiliar software is not going to improve things.

If I was cynical, I would suggest that most of the additional £945 million will come from penalties for getting things wrong.

As well as the quarterly summary reports, a final submission must be made after the end of the accounting period with all the usual adjustments (capital allowances, depreciation, research and development claims etc). Given that these adjustments are not required to be reported until the final submission for the period, this contradicts another of the HMRCclaims; that businesses will have accurate tax projections following the quarterly submissions.

As well as the MTD reports, annual self-assessment submissions will also be required to report any non-business income and to claim reliefs and allowances. With the introduction of both business and personal tax accounts, even the format for making these familiar annual returns is set to change.

MTD will apply to all but the smallest businesses - although the threshold for this has yet to be settled -but will include landlords with rental income above the threshold. It is therefore important for all business owners to take an interest in the new regime and to make sure that whatever digital record system they use will be compliant with the new requirements.

You will also need to consider how this will change the nature of the work performed by your accountant and how that may impact on the advice that they can give you.

O come all ye faithful and hear the (tax) angels sing

Chris Floyd, Director & Head of Tax Landers

Mary and her husband Joseph, like everyone else in the land, had been instructed by HM revenue & Customs to return to Birmingham to be assessed for taxes. Despite having nine months in which to do this, most people had waited until the week before the deadline to make the journey.

Fortunately Joseph could use the company donkey that had been provided by his employer, although he would discover that this constituted a 'benefit in kind' on which he would pay huge amounts of tax. Joseph would also have to pay tax on the oats and carrots that his employer had provided to feed the donkey.

When Joseph and Mary arrived in Birmingham, they realised that they should have booked a hotel in advance. Joseph received a message on his employer-provided smart phone - one of the few perks on which he did not currently have to pay tax - saying that the Holy Day Inn had a barn in which he and Mary may be able to stay. However, when they had found their way to the Inn they discovered that the barn had been bought by three russian Kings prior to april in order to avoid the three per cent increase in Stamp Duty Land Tax.

Consequence

Outside on the street, Joseph stood deep in the thought that he would have to be late with his tax and accept the £100 fine, when a passing shepherd, noticing that Mary was pregnant, offered his spare room to the couple. The shepherd was returning from a visit to his three wise tax advisers who had told him that he could receive up to £7,500 tax free from letting out his spare room under the rent a room scheme.

Joseph thought that, as paying his tax was a consequence of his job, it would be OK for his employer to pay for the room, just like they had done when he had previously been working away from his home. He would later find out that as this was not a qualifying expense he would have to pay tax and National Insurance on this personal liability paid for by his employer.

Later that night, while Joseph was searching for his bank interest certificate to present to Zacchaeus, the new tax collecting robot, Mary gave birth to their son.

Meanwhile the shepherd was out with his work colleagues for their annual party, watching Celebrity One Man and His Dog. The chief shepherd did not like his employees but the cost of the party would reduce his tax bill and would not be a taxable benefit for his employees so long as he spent no more than £150 per person each year.

The shepherds' entertainment was interrupted by a new posting on angelgrambook with a picture of the new baby. Sensing that this baby's story would go viral, the three shepherds hurried to visit him and his parents. However, when they got to the house, they found Joseph's three bosses there already. They had followed the bright flashes in the sky (from the paparazzi's cameras) until the lights stopped at the kind shepherd's house.

The three wise bosses had bought gifts of gold, share options and childcare vouchers. The gold was small, within the £50 trivial benefit in kind exemption. The share options in Joseph's employing company were structured through an Enterprise Management Initiative so that they would only be taxed at a later date. and while the childcare vouchers were within the taxfree limits, Joseph had agreed to sacrifice an equivalent amount of gross salary in exchange for these.

The shepherd did not have a gift to give the new parents but instead put Joseph in touch with his tax advisers so that Joseph could get the advice he needed to avoid tax bills of biblical proportions in the future.

Tax changes ease burden of compliance

Chris Floyd, tax specialist at Landers the Accountants, runs the rule over the new regulations that came into force in April.

MANY tax changes came into effect on April 6 this year. One of the more significant for employers is that dispensations from the reporting of expenses and
non-taxable benefits have ceased to exist. HM Revenue & Customs will not issue new ones and any previous agreements no longer apply. However, this does
not change the tax position on reimbursed expenses or tax free benefits. New rules remove the need for a dispensation in many situations by giving a
statutory exemption to the reporting of paid or reimbursed expenses. In brief, employers will no longer need to report reimbursed business expenses on
forms P11D where they do not give rise to a tax charge. This will reduce the compliance burden for the employer and will also reduce the claims that
employees have to make to avoid being taxed on genuine employment expenses.

Employers must still keep detailed records of all expenses paid or reimbursed and will need to continue to check any expense claims or credit card bills to
make sure that any non-business expenditure is either repaid in full by the employee or is reported as a benefit, either through the payroll or via a form
P11D.

Common items that will are covered by the new exemption include:

Travel, including associated subsistence costs;

Business entertainment expenses;

Credit cards used for business;

Fees and subscriptions.

Where actual receipted subsistence is reimbursed, the employer only needs to satisfy themself that the expenditure was incurred by the employee as part of
a qualifying business journey, or otherwise in the performance of their job. However, where a scale rate is paid - where there is a policy to pay a
specified amount to any employee in a given situation the exemption will only apply to amounts paid in accordance with the new legislation. For example,
where a scale rate is paid for subsistence, the amount paid must not exceed the limits in the Income Tax (Approved Expenses) Regulations 2015. For 2016/17
these are set as:

£5 where the qualifying travel in that day is five hours or more;

£10 where the duration of the travel is ten hours or more;

£25 where the travel is 15 hours or more and is ongoing at 8pm;

An additional £10 meal allowance can be paid where either the five hour or ten hour rate is paid and the travel is ongoing at8pm;

The word travel here means the amount of time away from the normal place of employment while on business - you do not have to be moving for the
hours quoted.

Any previous agreements with HMRC to pay any rates different to these, or scale rate payments for other items of business expenditure, ceased to apply on
April 6. Any employers wishing to continue with a non-statutory rate must apply to HMRC for approval. Where approval is given, it will last for a maximum
of five years before it must be reviewed and renewed.

Employers must have in place a system for checking expenses. This process must ensure that where scale rates are paid the employee is able to produce
receipts to HMRC if requested in order to confirm that there was some actual expenditure on each occasion where a scale rate payment was paid.

I encourage all employers to review their expense and subsistence policies to make sure they are in line with the new legislation, or to consider applying
to HMRC for approval of bespoke scale payments.

Van, bus, bike, at home... consider the alternatives 1st March

As the tax regime tightens, companies should be considering some more favourable transport options for their staff. Chris Floyd, Tax Director at Landers, looks at the possibilities.

WHEN it was conceived, an important factor in the design of Milton Keynes was to allow people to move easily and freely around. Dual carriageways, straight grid roads and separating vehicles and pedestrians were supposed to future proof transport throughout the new town.

For a while this worked well. But like all plans, if it is not reviewed and adjusted regularly it starts to become less efficient.

The same problem has arisen with the rules for taxing company cars. When the rules changed at the turn of the century to base the amount of tax on the carbon dioxide emissions of vehicles, the government managed to increase the tax take while convincing everyone that the changes were purely to reflect the growing importance of reducing our carbon footprint.

This, and other similar changes, forced the car manufacturers to look at ways of producing 'greener' cars while maintaining the performance that drivers desire. Ignoring the recent issues that the VWGroup has been dealing with, car makers have been fairly successful in achieving this. If reducing pollution had been the government's aim, they would be shouting their success from the (car) roof tops.

Instead, the Chancellor of the Exchequer has realised that the lower CO2 levels will reduce the money needed to balance his budget. As a result, most company car drivers will see a significant increase in the tax cost of this benefit over the next couple of years.

For some, a company car may be essential for the job. But for others there are alternatives to consider.

One of those considerations is whether or not one can replace a company car with a company van. In the right circumstances there will be no benefit in kind charge, otherwise the benefit value is fixed, regardless of the make and model.

There is also the option of replacing the company car with additional salary to enable the employee to purchase their own vehicle.Mileage payments at the HMRC approved rates can be paid free of tax for any business journeys undertaken.

For those who feel a little more energetic, there is the option of swapping horsepower for pedal power. The Cycle to Work scheme enables an employer to loan a cycle to an employee without a taxable benefit arising. The scheme is open to all employers and there are many third parties who will administer the scheme on behalf of an employer.

Where several employees travel the same journey or a similar route, it may be cost-effective for their employer to provide a works bus service. There would be no taxable benefit on the employee if this is within the HMRC rules. While this may at first appear to only be appropriate for larger employers, it is possible for several smaller employers to provide a joint bus service for their combined workforce.

Employees who uses bikes or buses to get to their workplace may still need to make journeys in the course of their employment. In these circumstances an employer could provide a suitable pool vehicle for these journeys. So long as the vehicle is used by more than one employee and there is no personal use, there will be no taxable benefit to report to HMRC.

Finally, there is the option of home working. There is plenty of technology available that can make it efficient for some workers to do their job from the comfort of their own homes, cutting out the need for any travel.

There are, of course, lots of rules and regulations surrounding all of the options above, so it is important that professional advice is sought by both employer and employee before any changes are made.

New rules house major headaches for landlords

THE INGENUITY of Kevin, Macaulay Culkin's character in the Home Alone films, may give us something to giggle about over the Christmas period but for many landlords the thought of tenants causing this much damage to a property is no laughing matter.

To add to these woes, landlords also have to deal with the changing tax rules thrown at them by the government. These include the removal of the ten per cent wear and tear allowance, originally introduced to make life simple for landlords who let furnished property. Rather than keeping detailed records of furniture and fixtures so that relief could be claimed when an item was replaced, they were allowed an expense of 10pc of the rent (after deducting any rates paid) each year.

From April 2016, most residential landlords will instead be able to claim relief on replacement of items such as furniture, crockery and carpets. The new rules will not apply to commercial property or holiday lets as relief is already available for these types of property through the existing capital allowance regime.

As with any change in the tax legislation there will be winners and losers but for most longterm property owners, there will be little overall effect. Of greater concern to many landlords will be the change in the way relief is given for finance costs associated with the property.

Currently a deduction is allowed in calculating the rental profit/loss for interest paid or costs incurred on borrowings used to purchase or improve the property. Such relief is also available on loans up to 100pc of the value of the property when first let. New rules taking effect from April 2017 will gradually restrict the relief on finance costs. The rules, which will be fully in place by April 2020, will provide for a tax credit equal to a maximum 20pc of costs incurred rather than a deduction for those costs.

Currently a higher rate tax payer who paid £2,000 in interest deducts this from his rental income and saves £800 of tax (40pc of £2,000). For each year from April 2017 to 2020, the maximum relief will be £700, £600, £500 and £400 respectively. The numbers in this example are small but where borrowing costs are higher and the number of properties greater, the effect of these changes will be much more significant.

Landlords who think they may not be affected by these changes because they are not higher rate taxpayers will need to take a closer look at their calculations. Removing the interest relief from their current rental profit calculations may push their income into the higher rate band: for example, rather than having a net rental profit of £3,000 taxable at 20pc, removing £5,000 of relief may result in a total profit of £8,000 with the additional profit taxed at 40pc, against which they would only get a tax deduction of £1,000. The tax liability would increase from £600 to £1,600, an increase of over 166pc on the same net income.

For some, it may be beneficial to incorporate their rental properties into a limited company. For others, this could create significant capital gains tax and stamp duty liabilities. It is therefore important for landlords to take considered professional advice to work out the best option for their particular circumstances.

For those who do not want to be home alone, it is worth knowing that from April rent-aroom relief - the amount one can receive from a lodger without having to pay tax on it - will increase from £4,250 to £7,500.